Words of Wisdom From Big Tesco PLC (TSCO) Backer Warren Buffett

Page 1 of 2

LONDON — Last week, Berkshire Hathaway Inc. (NYSE:BRK.B) boss Warren Buffett released his annual letter to shareholders.

How Slower Growth, Falling Oil Will Boost This Airline

If you’re a U.K. investor just starting out, U.S. investing legend Buffett may be new to you — perhaps your interest in the man has been piqued by reading about how he’s taken a big stake in Tesco PLC (LON:TSCO).I can tell you that Buffett’s annual letters never fail to educate, amuse, and enrich. You’ll find abundant pearls of wisdom in his witty, colourful, and incisive commentaries — as, indeed, will old hands.

586,817% and counting
Let’s start with why Buffett has captured the attention of millions of investors around the world. The bottom line is, his Berkshire Hathaway group has an outstanding record of increasing shareholder value over the best part of five decades.

Between 1965 and 2012, Berkshire’s book value per share has increased by a mind-boggling 586,817%, representing a compound annual growth rate of close to 20%. Such gains over such a long period are unparalleled.

Successful businesses
Buffett’s strategy of wealth creation for Berkshire is something ordinary investors like us can learn from in weighing up companies we may want to invest in.

Successful businesses generate cash. Buffett is clear about what a company should do with that cash, in the following order of priority:

First, examine reinvestment possibilities offered by its current business for increasing the competitive advantage over rivals.

Second, look at acquisitions that are likely to make shareholders wealthier on a per-share basis than they were prior to the acquisition.

Third, consider repurchasing the company’s own shares to enhance each investor’s share of future earnings.

Fourth, by default, pay dividends to shareholders.

Reinvestment and acquisitions
By reinvestment in the business, Buffett is referring to spending on projects “to become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic moat separating the company from its competitors.”

When we, ourselves, are considering companies to invest in, we can check how intelligently management is reinvesting in the business by looking at such things as whether market share is being maintained/increased, and whether margins are being maintained/grown relative to rivals.

Buffett considers small bolt-on acquisitions that can easily be integrated into existing operations as part of the reinvestment in the business. The acquisitions referred to in stage two of his four steps are those that add something new to the company — some form of diversification.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!